Gattaca has now released their interim results for the year ending 2017.

Revenues increased when compared to the first half of last year due to a £3M growth in engineering revenue and a £4.1M increase in technology revenue. Cost of sales also increased, however, and the gross profit declined by £1.1M. Share based payments reduced by £346K and the amortisation of acquired intangible decreased by £396K but acquisition and restructuring costs were up £212K and other admin expenses grew by6 £1M to give an operating profit £1.6M below last time. Finance income fell by £293K but finance costs were down £90K and tax expenses fell by £349K to give a profit for the period of £3.3M, a decline of £1.4M year on year.

When compared to the end point of last year, total assets declined by £2.4M driven by a £1.4M fall in acquired intangibles, a £1M decrease in cash and a £511K decline in other receivables, partially offset by a £407K growth in property, plant and equipment. Total liabilities also declined during the period as a £1.9M growth in the bank loan was more than offset by a £1.2M decline in payables, a £1.2M fall in current tax liabilities and a £689K decrease in deferred tax liabilities. The end result was a net tangible asset level of £33.4M, a growth of just £126K over the past six months.

Before movements in working capital, cash profits declined by £2.3M. There was a cash outflow from working capital and tax payments increased by £1.3M to give a net cash from operations of £3.3M, a decline of £10.5M year on year. The group spent £711K on property, plant and equipment along with £189K on intangible assets to give a free cash flow of £2.4M. This did not cover the £5.3M of dividends paid, however, so there was a cash outflow of £2.9M and a cash level of £14.3M at the period-end.

Overall, the performance in the period reflected the tougher UK trading conditions after the EU referendum. The softening in NFI was driven by near term uncertainty which led to elongated hiring decisions and some projects being delayed. The medium term outlook remains positive, however, with some signs of a return of confidence in recent weeks. With the integration of Networkers complete, the board now intend to consolidate their central cost base.

The operating profit for the Engineering division was £5.5M, a decline of £604K year on year. On a constant currency basis, Engineering NFI was down 4% as a 20% growth in engineering technology as the significant growth in demand for contractors in particular reflects the high volume of requirements and the shortage of candidates that exist in the market; and a 14% increase in aerospace, driven by strong demand from OEMs and their supply chains which they have targeted in recent years; was offset by other sectors, as offset by declines in other areas. After a challenging period in the UK following the Brexit vote, there are some recent signs of improving confidence.

In infrastructure, NFI was down 4% and whilst this business in the UK is benefiting from high demand for engineering staff in the private sector, especially across Highways Design and the Water Industry, some funding constraints in the public sector have resulted in certain projects being delayed in Highways Site and Rail. That said, with several major projects having been confirmed by the government, the division is in a strong position as this work starts to come through. This position is being replicated in the US with investments in offices and sales staff made in the period expected to start to deliver NFI growth on the back of major planned infrastructure upgrades.

In Maritime, NFI fell by 18%. The withdrawal of supply to some UK defence projects was partly offset by an increase in contractors on the offshore patrol vessel and Type 26 programmes. Contractor numbers continue to recover and this will accelerate towards the end of the year with the planned work on the Queen Elizabeth Aircraft Carriers. Internationally the group is well position to capitalise on some major ship building projects in North America.

Automotive NFI was down 14% where they have increased fulfilment and contractor numbers with major clients at lower margins. They have also seen a reduction in contingent business and permanent placements. The board expect to redress this trend over the next year.

Energy NFI was down 8%. Transmission and Distribution along with renewables remains the core growth markets, offset by continued lower demand in the oil and gas industry. The group continue to invest in the renewables sector with demand buoyant across both offshore and onshore wind programmes across the UK and Europe. In transmission and distribution the group continue to see extensive upgrades being carried out across Europe whilst in the nuclear sector they are anticipating opportunities as key projects come online such as Hinkley Point C.
In Asia they now have a sales team in Malaysia and after the period-end, they have established a team in China with some engineering placements being made in the first few weeks of trading. The solutions business which offers consulting services around clients’ employer brands has won new contracts in the period which they expect to start to contribute in the second half.

The operating profit for the Technology division was £2.5M, a decrease of £1.5M when compared to the first half of last year with technology NFI down 5% on a constant currency basis with the division also being impacted by Brexit, although again there are some signs of confidence returning. In the UK during the period the group delivered NFI growth in their Cloud, Cyber security, ERP contract business, offset by weakness in IT leadership, digital development and a reduction in the corporate accounts business.

In Cloud Infrastructure the group is starting to experience an increase in the contractor base, complemented by a steady improvement in the volume of permanent opportunities. The investment into the Cyber Security team is starting to gain traction as they build their capability in this area. After a couple of difficult years, the ERP business has stabilised and delivered 10% growth in the period within the Oracle and SAP contract resource market where they support consultancies and end users.

The leadership business is focused on the increasing need for staff within change and digital transformation. There has been a 14% growth in contract NFI during the period which is set to continue into H2, partially offset by a reduction in permanent placements. The digital development team was heavily reliant on a couple of corporate clients that have reduced demand significantly but there has been a growth in permanent roles. The group expect to return to growth in the contract business in the second half.

Corporate accounts were down 6% largely driven by the impact of the introduction of price caps in some of the NHS contracts. The international business acquired with Networkers is highly dependent on a small number of telecoms vendor clients which leads to a high degree of volatility. Telco NFI was down 5% on a constant currency basis.
Network Infrastructure was down 16%, partly due to the changing nature of the skillsets increasingly being sourced. This is reflected in the strong growth in the Operating and Billing support systems tem which grew NFI by 22%. The new teams’ focus on the Connected World and R&D are having success, growing NFI by 31% as they bring their experience supporting large system integrators and vendors to the SME market.

The group has recently established a technology sales business to support their technology clients with the need for sales staff at a senior level. Whilst it is still early days, they are experiencing strong demand, particularly in growing start up disruptive technology organisations. During the period the group have invested in 26 more sales people in their overseas locations to build scale and enable then to diversify their client base with a return on this spend now starting to come through. They have increased the number of contract and permanent accounts and are seeing the decline in Telco offset to some extent by the improvement in IT and Engineering internationally.

In the Americas they have increased the number of active contract clients from less than five at the time of the Networkers acquisition to more than twenty and have substantial retained permanent business to be billed in the second half of the year.

The integration of Networkers is now complete and annual cost savings will total £3.1M with £1.8M reinvested in the business. The final costs relating to the Networkers integration in the period were £600K higher than expected at £1.1M, mainly due to delays in the back office integration and additional redundancy costs.

After the period-end the group announced the acquisition of 70% of Resourcing Solutions, a niche engineering recruitment business, for £6.9M. The remaining 30% is subject to a put and call option exercisable from a year post-completion.

As previously announced, the board has reviewed its outlook for the rest of the year and now believes that profits will be about 10-15% below expectations. Whilst there are some signs of a return to confidence in recent weeks after the Brexit vote, it remains to be seen whether the uncertainty around a general election will have an effect.
At the current share price the shares are trading on a PE ratio of 9.9 which falls to 8.8 on the full year consensus forecast. After the interim dividend was kept the same, the shares are yielding 7.5% which is expected to remain the same for the full year. At the period-end the group had a net debt position of £27.9M compared to £24.8M at the same point of last year.

On the 26th April CEO Brian Wilkinson purchased 25,666 shares at a value of nearly £75K. He now owns 176,516 shares in the company.

Overall then this has been a fairly difficult period for the group what was characterised by delays to projects following the Brexit vote and an over-run of costs associated with the integration of Networkers. Profit was down during the period, as was the operating cash flow with the free cash not fully covering the dividends.

Within Engineering, infrastructure has been affected by public sector funding restraints which should be improved going forward; maritime was effected by projects coming to an end but again, the start of the QE Aircraft carrier project should put an end to that. Automotive suffered from lower margins and lower permanent placements and the energy market is continuing to be constrained by low demand from oil and gas.

Within Technology, the underperformance was caused by Digital Development which saw a big reduction in demand from key clients, and corporate accounts which suffered from NHS price caps. Overall though, despite the disappointing results, confidence is apparently returning to the market and the forward PE of 8.8 and dividend yield of 7.5% this share is looking cheap. The debt level is fairly high, though, so that should be taken into account. Not sure what to do here.

On the 3rd August the group released a trading update covering the year where they stated that they expect profits to be broadly in line with expectations. Total NFI fell by 4% in the year with a 5% reduction in H1 and a 3% decline in H2. Both Engineering and Technology saw decreases with Technology faring slightly worse.
There has been some recovery following the initial uncertainty surrounding Brexit but the impact on business confidence is unlikely to lead to an increase in customer demand in the near and medium term. As government sponsored infrastructure and defence programmes roll out, however, they expect to see a positive impact on the business which should offset any weakness in the overall economy.

There was a bit of a pick up in Q4, with NFI down just 2.4%, benefiting from an improvement in the US business. Engineering saw H1 down 4% and H2 down 1%. There was double digit percentage growth in Aerospace and Engineering Technology but this was offset by more challenging markets in infrastructure, maritime, energy and automotive as well as in Barclay Meade. The acquisition of Resourcing Solutions has strengthened the group’s position in rail and is delivering the benefits expected at the time of acquisition.

Technology declined by 6% in both H1 and H2. This was solely the result of a decline in Telco, down 10%, as demand for the group’s network infrastructure market declined and gains from their strategic segmentation could only partially offset this. In It they say H2 grow 1%, however, as the segmentation introduced last year started to show results.

The US business has grown by 52% in H2 and 21% for the full year. Year on year, NFI for the Americas region was up 29% in H2 and 9% in the year. Asia NFI for the year was up 2% while MEA was down 17% due to contract reductions in South Africa and weak demand in Oil and Gas in the Middle East. Total international NFI for the year was down 3% with a 7% fall in H1 and a 0.3% growth in H2.

Net debt stood at £41M, up from £28M at the end of the first half. The major driver of the increase was the acquisition of RSL for £11.5M but working capital was also a factor with debtor days increasing by two days over the six month period. Actions were implemented in May to improve performance in this area and they are having a positive effect.

Overall there is not much to get excited about here but the shares are starting to look cheap. Possibly for good reason?